Security Analysis by Benjamin Graham and David Dodd was first published in 1934. It is a fundamental book for serious students of value investing. Here is the abstract from the book's Introduction.
In introducing the book, Mr. Graham and Mr. Dodd talk about searching for definite investment standards for fixed value and common stock investments. In doing so, the authors found more warnings than definite standards.
In the field of high-grade bonds and preferred stocks, the authors think investors need to consider three areas.
- Safety of Interest and Principal: With careful analysis and selection, serious losses could be avoided.
- Future interest rates and Bond Prices: Given the uncertainties, proper bond maturity selection is important. For small investors, United States Savings Bonds are the best option.
- The value of the Dollar: There are risks of a decline in purchasing power of the dollar. So, including common stocks or tangible assets in the portfolio provides protection.
For speculative bonds and preferred stocks, Mr. Graham and Mr. Dodd think investments should be treated as investing in common stocks and the risk of loss should be substituted by a potential rise in principal value rather than a higher yield.
When dealing with common stocks, the authors talk about the usual misconception in the market that "a good stock is a good investment". Balance sheet value, and earning power analysis is often neglected. Common stock investments should be based on careful analysis of value with a margin of safety of the principal. In doing so, investors should consider the future of corporate profits, business quality, interest rates, and the factor of timing. However, Mr. Graham and Mr. Dodd are clear that market timing cannot be done. Furthermore, the authors assert interest rate affects common stock values.
In conclusion, Mr. Graham and Mr. Dodd propose the principle that investors should wait for depressed market levels to buy common stocks. In addition, investment opportunities could be found in secondary companies under all conditions, except at the peak of the bull market.
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